Is ESG Risk Priced?

Factor investing entails exposure to ESG risk. How big is the exposure to this risk ? Is this exposure rewarded by the market ? We investigate the relevance of ESG risk for a cross section (15) of market anomalies long-short portfolios. The Environmental dimension of ESG is consistently relevant for the cross sectional variation in returns (alphas) and its beta risk is priced. This result is extremely robust including under shrinkage of the cross section. The market price of risk is shown to be negative and close to -0.200% monthly over the period 1992-2017. It is associated with a loading which varies between -0.450 and 1.093. Defensive equity (i.e., low volatility and/or low beta stocks) load positively on the E Factor. Since the market price of risk is negative, E exposure can potentially explain the low volatility and low beta anomalies